Affirming the Bankruptcy Appellate Panel, the Ninth Circuit narrowly defined a tax return, leaving debtors with nondischargeable tax debts if they didn’t file something that looks like traditional tax returns within the prescribed time.
The 2005 amendments to Section 523 included a so-called hanging paragraph that gave some flexibility to what constitutes a tax return. However, the Ninth Circuit sticks to the venerable Beard test and won’t allow debtors to provide taxing authorities with a dollop of information and expect a discharge of delinquent taxes.
The opinion by the Ninth Circuit on December 6 does not deal with the longstanding circuit split over the dischargeability of taxes when returns are filed even one day late. See, e.g., Mass. Dept. of Revenue v. Shek (In re Shek), 947 F.3d 770 (11th Cir. Jan. 23, 2020), and click here for ABI’s discussion.
The Nonfiled State Tax Returns
The debtor failed to file California state tax returns for four years in the 1990s. In 2007, the Internal Revenue Service made upward adjustments to the debtor’s federal tax liability for those four years.
In 2009, the debtor’s counsel sent a fax to the California state taxing authority that included a form from the IRS showing the adjustments to the federal tax and the debtor’s taxable income. In the fax, the debtor’s counsel said that the debtor conceded the adjustments.
In response, the state taxing authority sent the debtor a notice of proposed assessments for those four years. The notice stated that the state had no records of having received the debtor’s state income tax returns.
The debtor filed a chapter 13 petition in 2014 that was converted to chapter 7.
The state filed an adversary proceeding to declare that the taxes were not dischargeable under Section 523(a)(1)(B) because the debtor had not filed state tax returns for the years in question.
On summary judgment, the bankruptcy court ruled that the taxes were nondischargeable. The BAP affirmed. The debtor appealed to the circuit but lost for a third time in an opinion by Circuit Judge Sidney R. Thomas.
The Statutes
Section 523(a)(1)(B) bars the discharge of a tax debt for which the debtor did not file a “return.” The 2005 amendments added a hanging paragraph at the end of Section 523(a) that says that “a ‘return’ means a return that satisfies the requirements of applicable nonbankruptcy law . . . [and] includes a return prepared [by the IRS] pursuant to section 6020(a) [of the IRS Code] . . . or similar State or local law.”
Section 6020(a) of the IRS Code pertains to taxpayers who do not file tax returns but disclose “all information” necessary for the preparation of a return. The IRS may then prepare a return that becomes the taxpayer’s return on “being signed by such person.”
The debtor argued that his fax was “similar” to the type of a return specified in Section 6020(a) and a parallel California statute. The provision in the state tax code says:
If any item . . . on a federal tax return . . . is changed or corrected [by the IRS], . . . that taxpayer shall report each change . . . and shall concede the accuracy of the determination or state wherein it is erroneous.
It’s Not Similar
Affirming the lower courts, Judge Thomas put it succinctly: The California statute “is not ‘similar’ to [Section] 6020(a).” He identified the difference.
The California tax law does not permit the state taxing authority to prepare a return. “[U]nder the plain words of the relevant statutes, the return exception contained in § 523(a)’s hanging paragraph does not apply,” Judge Thomas said.
The debtor also argued that his fax was the “functional equivalent” of a tax return because his counsel provided all the information required to calculate state tax liability.
Judge Thomas evaluated the argument under the so-called Beard test emanating from the federal Tax Court. Beard v. Commissioner of IRS, 82 T.C. 766 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986).
The Ninth Circuit, he said, had adopted the Beard test. It requires something that (1) purports to be a return; (2) is executed under oath; (3) contains enough information to compute the tax; and (4) is an “honest and reasonable” attempt to comply with tax law.
The fax failed every element of the Beard test. The debtor, Judge Thomas said, did not file a return that complied with state law, and the fax did not purport to be a return. It was not submitted under oath. Indeed, the debtor did not sign the document. It was sent by the debtor’s lawyer and did not include enough information “to allow complete computation of state tax.”
According to Judge Thomas, the fax only communicated information about a federal tax proceeding and was not an “honest and reasonable attempt” to comply with tax law.
Judge Thomas affirmed the BAP because the fax “did not constitute state tax returns under § 523(a)’s hanging paragraph.”
Affirming the Bankruptcy Appellate Panel, the Ninth Circuit narrowly defined a tax return, leaving debtors with nondischargeable tax debts if they didn’t file something that looks like traditional tax returns within the prescribed time.
The 2005 amendments to Section 523 included a so-called hanging paragraph that gave some flexibility to what constitutes a tax return. However, the Ninth Circuit sticks to the venerable Beard test and won’t allow debtors to provide taxing authorities with a dollop of information and expect a discharge of delinquent taxes.
The opinion by the Ninth Circuit on December 6 does not deal with the longstanding circuit split over the dischargeability of taxes when returns are filed even one day late.